Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2017.
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____________________ to _____________________.
Commission file number 0-4604
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
Ohio | | 31-0746871 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
6200 S. Gilmore Road, Fairfield, Ohio | | 45014-5141 |
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: (513) 870-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þYes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þYes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer ¨ Accelerated filer ¨ Nonaccelerated filer ¨ Smaller reporting company
¨ Emerging growth company
(Do not check if a smaller reporting company)
¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
¨Yes þ No
As of April 21, 2017, there were 164,688,145 shares of common stock outstanding.
CINCINNATI FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017
TABLE OF CONTENTS
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 2
Part I – Financial Information
Item 1. Financial Statements (unaudited)
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
|
| | | | | | | | |
(Dollars in millions except per share data) | | March 31, | | December 31, |
| | 2017 | | 2016 |
Assets | | |
| | |
|
Investments | | |
| | |
|
Fixed maturities, at fair value (amortized cost: 2017—$9,981; 2016—$9,799) | | $ | 10,301 |
| | $ | 10,085 |
|
Equity securities, at fair value (cost: 2017—$3,240; 2016—$2,995) | | 5,676 |
| | 5,334 |
|
Other invested assets | | 90 |
| | 81 |
|
Total investments | | 16,067 |
| | 15,500 |
|
Cash and cash equivalents | | 543 |
| | 777 |
|
Investment income receivable | | 123 |
| | 134 |
|
Finance receivable | | 50 |
| | 51 |
|
Premiums receivable | | 1,588 |
| | 1,533 |
|
Reinsurance recoverable | | 544 |
| | 545 |
|
Prepaid reinsurance premiums | | 52 |
| | 62 |
|
Deferred policy acquisition costs | | 660 |
| | 637 |
|
Land, building and equipment, net, for company use (accumulated depreciation: 2017—$242; 2016—$237) | | 181 |
| | 183 |
|
Other assets | | 170 |
| | 198 |
|
Separate accounts | | 775 |
| | 766 |
|
Total assets | | $ | 20,753 |
| | $ | 20,386 |
|
| | | | |
Liabilities | | |
| | |
|
Insurance reserves | | |
| | |
|
Loss and loss expense reserves | | $ | 5,177 |
| | $ | 5,085 |
|
Life policy and investment contract reserves | | 2,689 |
| | 2,671 |
|
Unearned premiums | | 2,377 |
| | 2,307 |
|
Other liabilities | | 691 |
| | 786 |
|
Deferred income tax | | 946 |
| | 865 |
|
Note payable | | 17 |
| | 20 |
|
Long-term debt and capital lease obligations | | 825 |
| | 826 |
|
Separate accounts | | 775 |
| | 766 |
|
Total liabilities | | 13,497 |
| | 13,326 |
|
| | | | |
Commitments and contingent liabilities (Note 12) | |
|
| |
|
|
| | | | |
Shareholders' Equity | | |
| | |
|
Common stock, par value—$2 per share; (authorized: 2017 and 2016—500 million shares; issued: 2017 and 2016—198.3 million shares) | | 397 |
| | 397 |
|
Paid-in capital | | 1,243 |
| | 1,252 |
|
Retained earnings | | 5,156 |
| | 5,037 |
|
Accumulated other comprehensive income | | 1,780 |
| | 1,693 |
|
Treasury stock at cost (2017—33.7 million shares and 2016—33.9 million shares) | | (1,320 | ) | | (1,319 | ) |
Total shareholders' equity | | 7,256 |
| | 7,060 |
|
Total liabilities and shareholders' equity | | $ | 20,753 |
| | $ | 20,386 |
|
| | | | |
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 3
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
|
| | | | | | | |
(Dollars in millions except per share data) | Three months ended March 31, |
| 2017 | | 2016 |
Revenues | |
| | |
|
Earned premiums | $ | 1,208 |
| | $ | 1,154 |
|
Investment income, net of expenses | 149 |
| | 145 |
|
Realized investment gains, net | 160 |
| | 61 |
|
Fee revenues | 5 |
| | 3 |
|
Other revenues | 1 |
| | 1 |
|
Total revenues | 1,523 |
| | 1,364 |
|
Benefits and Expenses | |
| | |
|
Insurance losses and contract holders' benefits | 853 |
| | 724 |
|
Underwriting, acquisition and insurance expenses | 377 |
| | 360 |
|
Interest expense | 13 |
| | 13 |
|
Other operating expenses | 4 |
| | 2 |
|
Total benefits and expenses | 1,247 |
| | 1,099 |
|
Income Before Income Taxes | 276 |
| | 265 |
|
Provision for Income Taxes | |
| | |
|
Current | 40 |
| | 65 |
|
Deferred | 35 |
| | 12 |
|
Total provision for income taxes | 75 |
| | 77 |
|
Net Income | $ | 201 |
| | $ | 188 |
|
Per Common Share | |
| | |
|
Net income—basic | $ | 1.22 |
| | $ | 1.14 |
|
Net income—diluted | 1.21 |
| | 1.13 |
|
| | | |
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 4
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
|
| | | | | | | | |
(Dollars in millions) | | Three months ended March 31, |
| | 2017 | | 2016 |
Net Income | | $ | 201 |
| | $ | 188 |
|
Other Comprehensive Income | | |
| | |
|
Change in unrealized gains and losses on investments, net of tax of $46 and $100, respectively | | 85 |
| | 190 |
|
Amortization of pension actuarial gains and losses and prior service cost, net of tax of $0 and $1, respectively | | 1 |
| | — |
|
Change in life deferred acquisition costs, life policy reserves and other, net of tax of $1 and $(1), respectively | | 1 |
| | (3 | ) |
Other comprehensive income | | 87 |
| | 187 |
|
Comprehensive Income | | $ | 288 |
| | $ | 375 |
|
| | | | |
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 5
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
|
| | | | | | | | |
(Dollars in millions) | | Three months ended March 31, |
| | 2017 | | 2016 |
Common Stock | | | | |
Beginning of year | | $ | 397 |
| | $ | 397 |
|
Share-based awards | | — |
| | — |
|
End of period | | 397 |
| | 397 |
|
| | | | |
Paid-In Capital | | | | |
Beginning of year | | 1,252 |
| | 1,232 |
|
Share-based awards | | (18 | ) | | (10 | ) |
Share-based compensation | | 8 |
| | 7 |
|
Other | | 1 |
| | 1 |
|
End of period | | 1,243 |
| | 1,230 |
|
| | | | |
Retained Earnings | | | | |
Beginning of year | | 5,037 |
| | 4,762 |
|
Net income | | 201 |
| | 188 |
|
Dividends declared | | (82 | ) | | (79 | ) |
End of period | | 5,156 |
| | 4,871 |
|
| | | | |
Accumulated Other Comprehensive Income | | | | |
Beginning of year | | 1,693 |
| | 1,344 |
|
Other comprehensive income | | 87 |
| | 187 |
|
End of period | | 1,780 |
| | 1,531 |
|
| | | | |
Treasury Stock | | | | |
Beginning of year | | (1,319 | ) | | (1,308 | ) |
Share-based awards | | 17 |
| | 18 |
|
Shares acquired - share repurchase authorization | | (15 | ) | | — |
|
Shares acquired - share-based compensation plans | | (4 | ) | | (5 | ) |
Other | | 1 |
| | 1 |
|
End of period | | (1,320 | ) | | (1,294 | ) |
| | | | |
Total Shareholders' Equity | | $ | 7,256 |
| | $ | 6,735 |
|
| | | | |
(In millions) | | | | |
Common Stock - Shares Outstanding | | | | |
Beginning of year | | 164.4 |
| | 163.9 |
|
Share-based awards | | 0.5 |
| | 0.5 |
|
Shares acquired - share repurchase authorization | | (0.2 | ) | | — |
|
Shares acquired - share-based compensation plans | | (0.1 | ) | | — |
|
Other | | — |
| | — |
|
End of period | | 164.6 |
| | 164.4 |
|
| | | | |
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 6
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
| | | | | | | | |
(Dollars in millions) | | Three months ended March 31, |
| | 2017 | | 2016 |
Cash Flows From Operating Activities | | |
| | |
|
Net income | | $ | 201 |
| | $ | 188 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 14 |
| | 12 |
|
Realized investment gains, net | | (160 | ) | | (61 | ) |
Share-based compensation | | 8 |
| | 7 |
|
Interest credited to contract holders' | | 13 |
| | 13 |
|
Deferred income tax expense | | 35 |
| | 12 |
|
Changes in: | | |
| | |
|
Investment income receivable | | 11 |
| | 8 |
|
Premiums and reinsurance receivable | | (44 | ) | | (23 | ) |
Deferred policy acquisition costs | | (25 | ) | | (9 | ) |
Other assets | | (5 | ) | | (12 | ) |
Loss and loss expense reserves | | 92 |
| | 86 |
|
Life policy reserves | | 25 |
| | 22 |
|
Unearned premiums | | 70 |
| | 47 |
|
Other liabilities | | (139 | ) | | (90 | ) |
Current income tax receivable/payable | | 40 |
| | 65 |
|
Net cash provided by operating activities | | 136 |
| | 265 |
|
Cash Flows From Investing Activities | | |
| | |
|
Sale of fixed maturities | | 12 |
| | 14 |
|
Call or maturity of fixed maturities | | 249 |
| | 368 |
|
Sale of equity securities | | 216 |
| | 132 |
|
Purchase of fixed maturities | | (403 | ) | | (496 | ) |
Purchase of equity securities | | (313 | ) | | (129 | ) |
Investment in finance receivables | | (5 | ) | | (6 | ) |
Collection of finance receivables | | 6 |
| | 8 |
|
Investment in buildings and equipment, net | | (2 | ) | | (3 | ) |
Change in other invested assets, net | | (6 | ) | | 4 |
|
Net cash used in investing activities | | (246 | ) | | (108 | ) |
Cash Flows From Financing Activities | | |
| | |
|
Payment of cash dividends to shareholders | | (77 | ) | | (74 | ) |
Shares acquired - share repurchase authorization | | (15 | ) | | — |
|
Payments of note payable | | (3 | ) | | — |
|
Proceeds from stock options exercised | | 6 |
| | 9 |
|
Contract holders' funds deposited | | 23 |
| | 26 |
|
Contract holders' funds withdrawn | | (43 | ) | | (39 | ) |
Excess tax benefits on share-based compensation | | — |
| | 2 |
|
Other | | (15 | ) | | (12 | ) |
Net cash used in financing activities | | (124 | ) | | (88 | ) |
Net change in cash and cash equivalents | | (234 | ) | | 69 |
|
Cash and cash equivalents at beginning of year | | 777 |
| | 544 |
|
Cash and cash equivalents at end of period | | $ | 543 |
| | $ | 613 |
|
Supplemental Disclosures of Cash Flow Information: | | |
| | |
|
Income taxes paid (refunded) | | — |
| | (1 | ) |
Noncash Activities | | |
| | |
|
Conversion of securities | | $ | 4 |
| | $ | 3 |
|
Equipment acquired under capital lease obligations | | 3 |
| | 9 |
|
Cashless exercise of stock options | | 4 |
| | 5 |
|
Other assets and other liabilities | | 73 |
| | — |
|
| | | | |
Accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Our December 31, 2016, condensed consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.
Our March 31, 2017, condensed consolidated financial statements are unaudited. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2016 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.
Adopted Accounting Updates
ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-07, Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings once an investment qualifies for use of the equity method. It requires the equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting without retroactive adjustment. The effective date of ASU 2016-07 was for interim and annual reporting periods beginning after December 15, 2016, and was applied prospectively. The company adopted this ASU effective January 1, 2017 and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 was for interim and annual reporting periods beginning after December 15, 2016. The recognition and classification of the excess tax benefit provisions were applied prospectively in the results of operations and statement of cash flows. This adoption resulted in excess tax benefits of $6 million which reduced our current provision for income taxes in our results of operations. The statutory tax withholding classification, which are cash payments made to taxing authorities for shares withheld, were applied retrospectively and reclassified the statutory tax withholding requirements in the statement of cash flows from Other liabilities in operating activities to Other in financing activities. This statutory tax withholding reclassification resulted in $11 million and $8 million being included in financing activities for the three months ended March 31, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption of this ASU.
Pending Accounting Updates
ASU 2014-09 Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 8
reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted and will not have a material impact on our company’s financial position, cash flows or results of operations.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted. Our results of operations will be impacted as changes in fair value of equity securities will be reported in net income instead of reported in accumulated other comprehensive income.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for interim and annual reporting periods beginning after December 15, 2019. The ASU has not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows or results of operations.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of ASU 2016-15 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Costs. ASU 2017-07 provides guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans. The effective date of ASU 2017-07 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted; however, it is not expected to have a material impact on our company's consolidated financial position, cash flows or results of operations.
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 9
amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows or results of operations.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 10
NOTE 2 – Investments
The following table provides cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity and equity securities: |
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Cost or amortized cost | | | | | | |
| | | Gross unrealized | | Fair value |
At March 31, 2017 | | | gains | | losses | |
Fixed maturity securities: | | |
| | |
| | |
| | |
|
Corporate | | $ | 5,570 |
| | $ | 262 |
| | $ | 17 |
| | $ | 5,815 |
|
States, municipalities and political subdivisions | | 3,879 |
| | 110 |
| | 37 |
| | 3,952 |
|
Commercial mortgage-backed | | 282 |
| | 6 |
| | 1 |
| | 287 |
|
Government-sponsored enterprises | | 219 |
| | — |
| | 3 |
| | 216 |
|
United States government | | 16 |
| | — |
| | — |
| | 16 |
|
Foreign government | | 10 |
| | — |
| | — |
| | 10 |
|
Convertibles and bonds with warrants attached | | 5 |
| | — |
| | — |
| | 5 |
|
Subtotal | | 9,981 |
| | 378 |
| | 58 |
| | 10,301 |
|
Equity securities: | | |
| | |
| | |
| | |
|
Common equities | | 3,051 |
| | 2,411 |
| | 9 |
| | 5,453 |
|
Nonredeemable preferred equities | | 189 |
| | 34 |
| | — |
| | 223 |
|
Subtotal | | 3,240 |
| | 2,445 |
| | 9 |
| | 5,676 |
|
Total | | $ | 13,221 |
| | $ | 2,823 |
| | $ | 67 |
| | $ | 15,977 |
|
At December 31, 2016 | | |
| | |
| | |
| | |
|
Fixed maturity securities: | | |
| | |
| | |
| | |
|
Corporate | | $ | 5,555 |
| | $ | 252 |
| | $ | 26 |
| | $ | 5,781 |
|
States, municipalities and political subdivisions | | 3,770 |
| | 100 |
| | 42 |
| | 3,828 |
|
Commercial mortgage-backed | | 282 |
| | 7 |
| | 2 |
| | 287 |
|
Government-sponsored enterprises | | 167 |
| | — |
| | 3 |
| | 164 |
|
United States government | | 10 |
| | — |
| | — |
| | 10 |
|
Foreign government | | 10 |
| | — |
| | — |
| | 10 |
|
Convertibles and bonds with warrants attached | | 5 |
| | — |
| | — |
| | 5 |
|
Subtotal | | 9,799 |
| | 359 |
| | 73 |
| | 10,085 |
|
Equity securities: | | |
| | |
| | |
| | |
|
Common equities | | 2,812 |
| | 2,320 |
| | 9 |
| | 5,123 |
|
Nonredeemable preferred equities | | 183 |
| | 28 |
| | — |
| | 211 |
|
Subtotal | | 2,995 |
| | 2,348 |
| | 9 |
| | 5,334 |
|
Total | | $ | 12,794 |
| | $ | 2,707 |
| | $ | 82 |
| | $ | 15,419 |
|
| | | | | | | | |
The net unrealized investment gains in our fixed-maturity portfolio at March 31, 2017, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at March 31, 2017, and December 31, 2016. The seven largest unrealized investment gains in our common stock portfolio are from JP Morgan Chase & Co. (NYSE:JPM), Honeywell International Incorporated (NYSE:HON), Apple Inc. (Nasdaq:AAPL), Hasbro Inc. (Nasdaq:HAS), Microsoft Corporation (Nasdaq: MSFT), Exxon Mobil Corporation (NYSE:XOM), and Johnson & Johnson (NYSE:JNJ), which had a combined gross unrealized gain of $760 million. At March 31, 2017, Apple Inc. was our largest single equity holding with a fair value of $201 million, which was 3.7 percent of our publicly traded common equities portfolio and 1.3 percent of the total investment portfolio.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 11
The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities’ continuous unrealized loss positions:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Less than 12 months | | 12 months or more | | Total |
| | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
At March 31, 2017 | | | | | | |
Fixed maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Corporate | | $ | 381 |
| | $ | 10 |
| | $ | 136 |
| | $ | 7 |
| | $ | 517 |
| | $ | 17 |
|
States, municipalities and political subdivisions | | 883 |
| | 37 |
| | — |
| | — |
| | 883 |
| | 37 |
|
Commercial mortgage-backed securities | | 75 |
| | 1 |
| | 2 |
| | — |
| | 77 |
| | 1 |
|
Government-sponsored enterprises | | 165 |
| | 3 |
| | — |
| | — |
| | 165 |
| | 3 |
|
United States government | | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
|
Subtotal | | 1,510 |
| | 51 |
| | 138 |
| | 7 |
| | 1,648 |
| | 58 |
|
Equity securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Common equities | | 236 |
| | 9 |
| | 4 |
| | — |
| | 240 |
| | 9 |
|
Subtotal | | 236 |
| | 9 |
| | 4 |
| | — |
| | 240 |
| | 9 |
|
Total | | $ | 1,746 |
| | $ | 60 |
| | $ | 142 |
| | $ | 7 |
| | $ | 1,888 |
| | $ | 67 |
|
At December 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
|
Fixed maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Corporate | | $ | 733 |
| | $ | 15 |
| | $ | 189 |
| | $ | 11 |
| | $ | 922 |
| | $ | 26 |
|
States, municipalities and political subdivisions | | 989 |
| | 42 |
| | — |
| | — |
| | 989 |
| | 42 |
|
Commercial mortgage-backed | | 89 |
| | 2 |
| | 2 |
| | — |
| | 91 |
| | 2 |
|
Government-sponsored enterprises | | 155 |
| | 3 |
| | — |
| | — |
| | 155 |
| | 3 |
|
United States government | | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
|
Subtotal | | 1,972 |
| | 62 |
| | 191 |
| | 11 |
| | 2,163 |
| | 73 |
|
Equity securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Common equities | | 103 |
| | 9 |
| | — |
| | — |
| | 103 |
| | 9 |
|
Nonredeemable preferred equities | | 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
|
Subtotal | | 107 |
| | 9 |
| | — |
| | — |
| | 107 |
| | 9 |
|
Total | | $ | 2,079 |
| | $ | 71 |
| | $ | 191 |
| | $ | 11 |
| | $ | 2,270 |
| | $ | 82 |
|
| | | | | | | | | | | | |
Contractual maturity dates for fixed-maturity investments were:
|
| | | | | | | | | | | |
(Dollars in millions) | | Amortized cost | | Fair value | | % of fair value |
At March 31, 2017 | | | |
Maturity dates: | | |
| | |
| | |
|
Due in one year or less | | $ | 655 |
| | $ | 669 |
| | 6.5 | % |
Due after one year through five years | | 2,764 |
| | 2,911 |
| | 28.3 |
|
Due after five years through ten years | | 3,862 |
| | 3,981 |
| | 38.6 |
|
Due after ten years | | 2,700 |
| | 2,740 |
| | 26.6 |
|
Total | | $ | 9,981 |
| | $ | 10,301 |
| | 100.0 | % |
| | | | | | |
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 12
The following table provides investment income, realized investment gains and losses, the change in unrealized investment gains and losses:
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31, |
| 2017 | | 2016 |
Investment income: | | | |
Interest | $ | 111 |
| | $ | 109 |
|
Dividends | 39 |
| | 37 |
|
Other | 1 |
| | 1 |
|
Total | 151 |
| | 147 |
|
Less investment expenses | 2 |
| | 2 |
|
Total | $ | 149 |
| | $ | 145 |
|
| | | |
Realized investment gains and losses: | |
| | |
|
Fixed maturities: | |
| | |
|
Gross realized gains | $ | 10 |
| | $ | 3 |
|
Gross realized losses | — |
| | (1 | ) |
Other-than-temporary impairments | — |
| | (2 | ) |
Equity securities: | |
| | |
|
Gross realized gains | 153 |
| | 62 |
|
Gross realized losses | (4 | ) | | (1 | ) |
Other-than-temporary impairments | — |
| | — |
|
Other | 1 |
| | — |
|
Total | $ | 160 |
| | $ | 61 |
|
| | | |
Change in unrealized investment gains and losses: | |
| | |
|
Fixed maturities | $ | 34 |
| | $ | 116 |
|
Equity securities | 97 |
| | 174 |
|
Income tax (provision) benefit | (46 | ) | | (100 | ) |
Total | $ | 85 |
| | $ | 190 |
|
| | | |
During the three months ended March 31, 2017, there were no equity securities and no fixed-maturity securities other-than-temporarily impaired. During the three months ended March 31, 2016, there were no equity securities and two fixed-maturity securities other-than-temporarily impaired. There were no credit losses on fixed-maturity securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income for the three months ended March 31, 2017 and 2016.
At March 31, 2017, 22 fixed-maturity investments with a total unrealized loss of $7 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investment had a fair value below 70 percent of amortized cost. At March 31, 2017, one equity investment with a total unrealized loss of less than $1 million had been in an unrealized loss position for 12 months or more. There were no equity investments with a fair value below 70 percent of amortized cost. At December 31, 2016, 32 fixed-maturity investments with a total unrealized loss of $11 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2016.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 13
NOTE 3 – Fair Value Measurements
In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2016, and ultimately management determines fair value. See our 2016 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 14
Fair Value Disclosures for Assets
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at March 31, 2017, and December 31, 2016. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
At March 31, 2017 | | | | |
Fixed maturities, available for sale: | | |
| | |
| | |
| | |
|
Corporate | | $ | — |
| | $ | 5,814 |
| | $ | 1 |
| | $ | 5,815 |
|
States, municipalities and political subdivisions | | — |
| | 3,952 |
| | — |
| | 3,952 |
|
Commercial mortgage-backed | | — |
| | 287 |
| | — |
| | 287 |
|
Government-sponsored enterprises | | — |
| | 216 |
| | — |
| | 216 |
|
United States government | | 16 |
| | — |
| | — |
| | 16 |
|
Foreign government | | — |
| | 10 |
| | — |
| | 10 |
|
Convertibles and bonds with warrants attached | | — |
| | 5 |
| | — |
| | 5 |
|
Subtotal | | 16 |
| | 10,284 |
| | 1 |
| | 10,301 |
|
Common equities, available for sale | | 5,453 |
| | — |
| | — |
| | 5,453 |
|
Nonredeemable preferred equities, available for sale | | — |
| | 223 |
| | — |
| | 223 |
|
Separate accounts taxable fixed maturities | | — |
| | 764 |
| | — |
| | 764 |
|
Top Hat savings plan mutual funds and common
equity (included in Other assets) | | 27 |
| | — |
| | — |
| | 27 |
|
Total | | $ | 5,496 |
| | $ | 11,271 |
| | $ | 1 |
| | $ | 16,768 |
|
| | | | | | | | |
At December 31, 2016 | | | | | | | | |
Fixed maturities, available for sale: | | |
| | |
| | |
| | |
|
Corporate | | $ | — |
| | $ | 5,703 |
| | $ | 78 |
| | $ | 5,781 |
|
States, municipalities and political subdivisions | | — |
| | 3,828 |
| | — |
| | 3,828 |
|
Commercial mortgage-backed | | — |
| | 287 |
| | — |
| | 287 |
|
Government-sponsored enterprises | | — |
| | 164 |
| | — |
| | 164 |
|
United States government | | 10 |
| | — |
| | — |
| | 10 |
|
Foreign government | | — |
| | 10 |
| | — |
| | 10 |
|
Convertibles and bonds with warrants attached | | — |
| | 5 |
| | — |
| | 5 |
|
Subtotal | | 10 |
| | 9,997 |
| | 78 |
| | 10,085 |
|
Common equities, available for sale | | 5,123 |
| | — |
| | — |
| | 5,123 |
|
Nonredeemable preferred equities, available for sale | | — |
| | 211 |
| | — |
| | 211 |
|
Separate accounts taxable fixed maturities | | — |
| | 750 |
| | — |
| | 750 |
|
Top Hat savings plan mutual funds and common equity (included in Other assets) | | 24 |
| | — |
| | — |
| | 24 |
|
Total | | $ | 5,157 |
| | $ | 10,958 |
| | $ | 78 |
| | $ | 16,193 |
|
| | | | | | | | |
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of March 31, 2017. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 15
The following table provides the change in Level 3 assets for the three months ended March 31:
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | Asset fair value measurements using significant unobservable inputs |
| | Corporate fixed maturities | | Taxable fixed maturities - separate accounts | | Nonredeemable preferred equities | | Total |
Beginning balance, January 1, 2017 | | $ | 78 |
| | $ | — |
| | $ | — |
| | $ | 78 |
|
Total gains or losses (realized/unrealized): | | | | | | |
| | |
|
Included in net income | | — |
| | — |
| | — |
| | — |
|
Included in other comprehensive income | | — |
| | — |
| | — |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
|
Sales | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 | | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 | | (77 | ) | | — |
| | — |
| | (77 | ) |
Ending balance, March 31, 2017 | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | |
Beginning balance, January 1, 2016 | | $ | 51 |
| | $ | 1 |
| | $ | 3 |
| | $ | 55 |
|
Total gains or losses (realized/unrealized): | | | | | | |
| | |
Included in net income | | — |
| | — |
| | — |
| | — |
|
Included in other comprehensive income | | — |
| | — |
| | (1 | ) | | (1 | ) |
Purchases | | 5 |
| | — |
| | — |
| | 5 |
|
Sales | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 | | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 | | (5 | ) | | — |
| | — |
| | (5 | ) |
Ending balance, March 31, 2016 | | $ | 51 |
| | $ | 1 |
| | $ | 2 |
| | $ | 54 |
|
| | | | | | | | |
Additional disclosures for the Level 3 category are not material.
Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value
The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.
This table summarizes the book value and principal amounts of our long-term debt:
|
| | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | Book value | | Principal amount |
Interest rate | | Year of issue | | | | March 31, | | December 31, | | March 31, | | December 31, |
| | | | 2017 | | 2016 | | 2017 | | 2016 |
6.900 | % | | 1998 | | Senior debentures, due 2028 | | $ | 26 |
| | $ | 26 |
| | $ | 28 |
| | $ | 28 |
|
6.920 | % | | 2005 | | Senior debentures, due 2028 | | 391 |
| | 391 |
| | 391 |
| | 391 |
|
6.125 | % | | 2004 | | Senior notes, due 2034 | | 370 |
| | 370 |
| | 374 |
| | 374 |
|
|
| | | | Total | | $ | 787 |
| | $ | 787 |
| | $ | 793 |
| | $ | 793 |
|
| | | | | | | | | | | | |
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 16
The following table shows fair values of our note payable and long-term debt:
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
At March 31, 2017 | | | | |
Note payable | | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
|
6.900% senior debentures, due 2028 | | — |
| | 33 |
| | — |
| | 33 |
|
6.920% senior debentures, due 2028 | | — |
| | 497 |
| | — |
| | 497 |
|
6.125% senior notes, due 2034 | | — |
| | 450 |
| | — |
| | 450 |
|
Total | | $ | — |
| | $ | 997 |
| | $ | — |
| | $ | 997 |
|
| | | | | | | | |
At December 31, 2016 | | | | | | | | |
Note payable | | $ | — |
| | $ | 20 |
| | $ | — |
| | $ | 20 |
|
6.900% senior debentures, due 2028 | | — |
| | 33 |
| | — |
| | 33 |
|
6.920% senior debentures, due 2028 | | — |
| | 488 |
| | — |
| | 488 |
|
6.125% senior notes, due 2034 | | — |
| | 435 |
| | — |
| | 435 |
|
Total | | $ | — |
| | $ | 976 |
| | $ | — |
| | $ | 976 |
|
| | | | | | | | |
The following table shows the fair value of our life policy loans included in other invested assets:
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
At March 31, 2017 | | | | |
Life policy loans | | $ | — |
| | $ | — |
| | $ | 40 |
| | $ | 40 |
|
| | | | | | | | |
At December 31, 2016 | | | | | | | | |
Life policy loans | | $ | — |
| | $ | — |
| | $ | 40 |
| | $ | 40 |
|
| | | | | | | | |
Outstanding principal and interest for these life policy loans totaled $30 million and $31 million at March 31, 2017, and December 31, 2016, respectively.
The following table shows fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
At March 31, 2017 | | | | |
Deferred annuities | | $ | — |
| | $ | — |
| | $ | 844 |
| | $ | 844 |
|
Structured settlements | | — |
| | 203 |
| | — |
| | 203 |
|
Total | | $ | — |
| | $ | 203 |
| | $ | 844 |
| | $ | 1,047 |
|
| | | | | | | | |
At December 31, 2016 | | | | | | | | |
Deferred annuities | | $ | — |
| | $ | — |
| | $ | 839 |
| | $ | 839 |
|
Structured settlements | | — |
| | 206 |
| | — |
| | 206 |
|
Total | | $ | — |
| | $ | 206 |
| | $ | 839 |
| | $ | 1,045 |
|
| | | | | | | | |
Recorded reserves for the deferred annuities were $858 million and $861 million at March 31, 2017, and December 31, 2016, respectively. Recorded reserves for the structured settlements were $166 million and $170 million at March 31, 2017, and December 31, 2016, respectively.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 17
NOTE 4 – Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss expense reserves: |
| | | | | | | |
(Dollars in millions) | Three months ended March 31, |
| 2017 | | 2016 |
Gross loss and loss expense reserves, beginning of period | $ | 5,035 |
| | $ | 4,660 |
|
Less reinsurance recoverable | 298 |
| | 281 |
|
Net loss and loss expense reserves, beginning of period | 4,737 |
| | 4,379 |
|
Net incurred loss and loss expenses related to: | |
| | |
|
Current accident year | 826 |
| | 723 |
|
Prior accident years | (38 | ) | | (62 | ) |
Total incurred | 788 |
| | 661 |
|
Net paid loss and loss expenses related to: | |
| | |
|
Current accident year | 185 |
| | 146 |
|
Prior accident years | 509 |
| | 416 |
|
Total paid | 694 |
| | 562 |
|
Net loss and loss expense reserves, end of period | 4,831 |
| | 4,478 |
|
Plus reinsurance recoverable | 297 |
| | 272 |
|
Gross loss and loss expense reserves, end of period | $ | 5,128 |
| | $ | 4,750 |
|
| | | |
We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $49 million at March 31, 2017, and
$54 million at March 31, 2016, for certain life and health loss and loss expense reserves.
For the three months ended March 31, 2017, we experienced $38 million of favorable development on prior accident years, including $11 million of favorable development in commercial lines, $10 million of favorable development in personal lines, $13 million of favorable development in excess and surplus lines and $4 million of favorable development in our reinsurance assumed operations. This included $11 million from favorable development of catastrophe losses for the three months ended March 31, 2017. For the three months ended
March 31, 2017, we recognized favorable reserve development of $18 million for the workers' compensation line, $10 million for the commercial property line and $8 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. For the three months ended
March 31, 2017, we recognized unfavorable reserve development of $15 million for the commercial casualty line and $10 million for the commercial auto line. The unfavorable reserve development for commercial casualty reflected higher than usual large loss activity. Commercial auto developed unfavorably due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 18
For the three months ended March 31, 2016, we experienced $62 million of favorable development on prior accident years, including $29 million of favorable development in commercial lines, $18 million of favorable development in personal lines, $14 million of favorable development in excess and surplus lines, and $1 million of favorable development in our reinsurance assumed operations. This included $7 million from favorable development of catastrophe losses for the three months ended March 31, 2016. We recognized favorable reserve development during the three months ended March 31, 2016, of $13 million for the workers' compensation line,
$8 million for the commercial property line, $13 million for the other commercial lines and $8 million for the homeowner line due to reduced uncertainty of prior accident year loss and loss adjustment expenses for these lines. Our commercial auto line developed unfavorably by $8 million for the three months ended March 31, 2016, due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 19
NOTE 5 – Life Policy and Investment Contract Reserves
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates, timing of claim presentation and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates as well as for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.
We establish reserves for the company’s deferred annuity, universal life and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.
This table summarizes our life policy and investment contract reserves: |
| | | | | | | | |
(Dollars in millions) | | March 31,
2017 | | December 31, 2016 |
Life policy reserves: | | | | |
Ordinary/traditional life | | $ | 1,026 |
| | $ | 1,011 |
|
Other | | 45 |
| | 45 |
|
Subtotal | | 1,071 |
| | 1,056 |
|
Investment contract reserves: | | | | |
Deferred annuities | | 858 |
| | 861 |
|
Universal life | | 588 |
| | 578 |
|
Structured settlements | | 166 |
| | 170 |
|
Other | | 6 |
| | 6 |
|
Subtotal | | 1,618 |
| | 1,615 |
|
Total life policy and investment contract reserves | | $ | 2,689 |
| | $ | 2,671 |
|
| | | | |
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 20
NOTE 6 – Deferred Policy Acquisition Costs
Expenses directly related to successfully acquired insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation.
|
| | | | | | | |
(Dollars in millions) | Three months ended March 31, |
| 2017 | | 2016 |
Property casualty: | | | |
Deferred policy acquisition costs asset, beginning of period | $ | 408 |
| | $ | 388 |
|
Capitalized deferred policy acquisition costs | 226 |
| | 210 |
|
Amortized deferred policy acquisition costs | (206 | ) | | (201 | ) |
Deferred policy acquisition costs asset, end of period | $ | 428 |
| | $ | 397 |
|
| | | |
Life: | | | |
Deferred policy acquisition costs asset, beginning of period | $ | 229 |
| | $ | 228 |
|
Capitalized deferred policy acquisition costs | 13 |
| | 12 |
|
Amortized deferred policy acquisition costs | (8 | ) | | (11 | ) |
Amortized shadow deferred policy acquisition costs | (2 | ) | | (8 | ) |
Deferred policy acquisition costs asset, end of period | $ | 232 |
| | $ | 221 |
|
| | | |
Consolidated: | | | |
Deferred policy acquisition costs asset, beginning of period | $ | 637 |
| | $ | 616 |
|
Capitalized deferred policy acquisition costs | 239 |
| | 222 |
|
Amortized deferred policy acquisition costs | (214 | ) | | (212 | ) |
Amortized shadow deferred policy acquisition costs | (2 | ) | | (8 | ) |
Deferred policy acquisition costs asset, end of period | $ | 660 |
| | $ | 618 |
|
| | | |
No premium deficiencies were recorded in the condensed consolidated statements of income, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
Cincinnati Financial Corporation First-Quarter 2017 10-Q
Page 21
NOTE 7 – Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) includes changes in unrealized gains and losses on investments, changes in pension obligations and changes in life deferred acquisition costs, life policy reserves and other as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Three months ended March 31, |
| 2017 | | | 2016 |
| Before tax | | Income tax | | Net | | | Before tax | | Income tax | | Net |
Investments: | | | | | | | | | | | | |
AOC |